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3 Things You Need to Know About DirecTV's NFL Sunday Ticket Deal

The agreement is an expensive loss leader for the satellite television provider.

As it came time to renegotiate their long-standing partnership, the National Football League and DirecTV (NASDAQ:DTV) were in a very different bargaining position than they had been in previous years. Whereas in past discussions both sides had equal need for the other, this time DirecTV needed to make a deal to continue its Sunday Ticket package or its $49 billion sale to AT&T (NYSE:T) could be called off.

That took away whatever leverage DirecTV had and forced it to make a deal for the package --which allows subscribers to see every NFL game -- that reportedly increased rights fees to $1.5 billion a season, news which ESPN sports business reporter Darren Rovell broke on Twitter.

This means that DirecTV will now pay more than CBS (NYSE:CBS), FOX (NASDAQ:FOX), and NBC, which all pay around $1 billion a year for their football packages, according to CBS Sports. Only ESPN, which pays $1.9 billion per year for its Monday Night Football package, spends more.

It's a huge amount of money for DirecTV to commit, but the satellite company really had no choice due to the clause in the AT&T deal.

DirecTV loses money offering the packageDirecTV does not report on how many of its customers pay for Sunday Ticket or the revenue they produce, but Bloomberg estimated in December 2013 that about 2 million U.S. subscribers, or 10% of the 20.3 million total, pay for the package. The satellite service offers a free year of Sunday Ticket to get customers to commit to a two-year contract. The cheapest deal which includes the free NFL offer costs $29.99 for the first 12 months which rises to $66.99 in year two.

In the disclaimer text which appears close to checkout when you order DirecTV service online, it says that the regular NFL Sunday Ticket "full-season retail price is $239.94" while the enhanced "MAX" package costs $329.94. If Bloomberg's number is correct -- and there are approximately 2 million paying NFL Sunday Ticket customers -- even if you assume every single one of them pays for the Max package, that still results in only $659,880,000, well less than the $1.5 billion DirecTV will be paying in rights fees. Even if Bloomberg underestimated and the paying number is 4 million, that's still only a little over $1.3 billion -- better, but still a loss.

The FCC decision to end local blackouts also applies to DirecTV (sort of)While some fans subscribe to Sunday Ticket because they love the NFL and others do it because they play fantasy football or are compulsive gamblers, many purchase the package because they don't live in the market of the team they follow. Sunday Ticket is the only way to watch out-of-market games without going to a sports bar, but one caveat to that has been the blackout rule, which prevented games from being televised in their local market if they were not sold out.

The FCC voted in late September to drop the federal version of the rule and that may put pressure on the NFL, which isn't planning to change its own blackout policies. While nothing has currently changed for DirecTV, which abides by the blackout rules, one possible compromise between the league and the government would be to only have the blackouts apply to free TV. That way the NFL could still exert pressure on local fans to buy tickets because non-sellouts would not be on free TV, but DirecTV subscribers who already pay would get the game.

DirecTV pays more for NFL viewers than any other broadcast partnerThe Kansas City Chiefs' blowout of the New England Patriots on the Sept. 29 edition of Monday Night Football on ESPN was watched in 10 million homes, according to Nielsen. That means that even for a blowout, the game on ESPN was being watched in five times as many households as there are paying Sunday Ticket households, and and it only pays $400 million more a season for its football rights. The numbers vary from week to week and the FOX and CBS packages involve multiple games each week, but it's clear that DirecTV pays dearly for each viewer it has without the added benefit the networks have of being able to use football to promote a primetime lineup.

Why does DirecTV even want this deal?On the surface, NFL Sunday Ticket looks like a money loser for DirecTV, but it's a strong product differentiator between it and cable as well as satellite rival DISH Network (NASDAQ:DISH). Though the package may not bring in enough money to support itself on the surface level, it brings in customers who may not stick with the package but do stick with the satellite carrier.

The biggest barrier DirecTV has in wooing customers is getting them to actually install a dish. If a free year of NFL games can lure customers in, then DirecTV can hold onto them even if they don't remain Sunday Ticket customers. That's an expensive ploy, but with AT&T being willing to pony up $49 billion for DirecTV, it's one that has clearly worked.

Author

Daniel B. Kline is an accomplished writer and editor who has worked for Microsoft on its Finance app and The Boston Globe, where he wrote for the paper and ran the Boston.com business desk. His latest book, "Worst Ideas Ever," (Skyhorse) can be purchased at bookstores everywhere.
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